The metal was also hurt by a spurt of technical selling after it was unable to hold on to the $1,300-an-ounce level hit early in the trading session.
Spot gold fell to a two-and-a-half-week low of $1,281.40, before pruning the losses to trade down 0.6 percent at $1,286.30 by 0641 GMT.
"One aspect is that the market is pretty thin today and liquidity is going to be constrained," said Victor Thianpiriya, an analyst at ANZ.
Australia, Hong Kong and London are closed on Monday for the Easter holiday.
"But people have been spooked by the near 10-tonne decline in SPDR holdings that we saw last week."
SPDR Gold Trust, the world's top gold ETF and a good measure of investor sentiment, saw outflows of 9.3 tonnes last week.
Before last week, the fund - closely watched due to the size of its holdings - had gained 6.2 tonnes from the beginning of 2014.
Last year, huge outflows from the fund were partly responsible for the 28 percent drop in gold's price. Investors shifted money to better-performing equities as the U.S. Federal Reserve began to unwind its monetary stimulus.
Due to the fund outflows, bullion investors have largely ignored the heightened geopolitical tensions in Ukraine which had earlier lent some safe-haven support for the metal.
At least three people were killed in a gunfight in the early hours of Sunday near a Ukrainian city controlled by pro-Russian separatists, shaking an already fragile international accord that was designed to avert a wider conflict.
The dollar index edged up on Monday. A stronger greenback makes the dollar-denominated metal more expensive for holders of other currencies. Physical demand remained quiet in Asia, led by subdued interest in top buyer China, where a weaker yuan has dented bullion imports.
In physical market news, China has begun allowing gold imports through its capital Beijing, sources familiar with the matter said, in a move that would help keep purchases discreet at a time when it might be boosting official reserves.
In news from the gold mining industry, sources told Reuters that talks between Barrick Gold Corp and Newmont Mining Corp over a combination that would create a gold mining behemoth have hit a snag, but the companies remain keen on a deal and discussions are likely to resume.